15 minutes of chaos that shook the world's biggest markets. What the heck is going on down here? I don't know. There is fear. This is capitulation really. On May 6th 2010, without warning, the U.S. stock market and
futures market just crushed. It can't be there. That is not a real price. The flash crash, which wiped a trillion
dollars off the value of American companies in five minutes. To look at a price chart, it looked like a kind of runaway elevator. It took authorities five years guys to track
down this lone British trader allegedly involved in a 2010 flash crash. Navinder Singh Sarao, dubbed the hound of Hounslow has been accused of
manipulating the market. U.S. regulators claim he
made about $40 Million. So Navinder Sarao he seems to be for all
intents and purposes, like a sort of arch criminal mastermind. What they find is very different. We're in a working class neighborhood about 11 miles from the city center and the financial district. It was hard to believe somebody trading this size
was just a lone trader. But that's where we were. I think it's ridiculous
to say that this guy in this house in the
suburbs, in England caused- Took down the market? It's ridiculous. If he really did, as the
U.S. prosecutors alleged make 40 million bucks, three people have now said to me, "Well, then why the heck is he
still living on our street?" On the one hand, he was a kind of common cheat. He purposefully manipulated the markets. On the other hand, he's this kind of genius kid from the wrong side of the tracks, who just decided to almost
stick two fingers up at the man and the establishment. And I think everyone could kind of relate to wanting to do that. I'm Liam Vaughan. I'm an investigative journalist
with Bloomberg in London, and I'm the author of a
book called, "Flash Crash", which tells the story
of the 2010 flash crash. And Navinder Singh Sarao the British day trader who was accused by the U.S. government of causing it from his bedroom. So Navinder Sarao was in a lot of ways quite an ordinary kid from
a working class neighborhood underneath the Heathrow flight path. Had a bit of a gob on him was always very kind of
fast and quick-witted, but also a little bit
quick to kind of anger. He had this gift for multiplication and for rapid thinking and for arithmetic. After university, he opens a newspaper and
it's the Evening Standard and there's an advert in there which says "Wanted, Futures Traders. "Must work well under pressure." Which, as you can imagine is not how they typically
recruit staff at JP Morgan. But this was a job at
these kind of fledgling entities that were known as arcades at that point in time. All the learning takes
place on the trading floor among some of the best traders in Europe. Essentially you eat what you kill. And that's something really powerful when you're seeking a career where you make your decisions and profit on those on
decisions on a daily basis. So Futex is above Waitrose Supermarket. It's about 45 minutes outside
of the City of London, miles away from the
skyscrapers of the City and Canary Wharf. And at first it's a fairly shabby office, which has got connections to the world's commodities exchanges. Now Nav had this kind of
background in computer games. He was incredibly focused and gifted at games like Halo and FIFA. And he was able to, he found sit for hours and hours at a time just focusing on one task
until he'd mastered it. Fast forward a couple
of years and Navinder is almost like a kind of
enigmatic figure at Futex. He has decided that he
can't stand the disruption of his colleagues chatting
amongst themselves, getting very excited with market moves. So he moves himself to a desk, completely isolated, where he can work on his own. He buys himself a pair of ear defenders. They're not headphones, they're literally ear defenders of the type that road workers use. So to the other traders there, lots of them wannabe traders he was almost like a god-like figure. Because they would see how
much money he was making the size of the trades
that he was placing. And it was just a
complete mystery to them how he was able to do it. So Nav traded a financial
instrument called the E-mini, which essentially tracks the S&P 500, which is a barometer essentially
of the US stock market. And he's able to build a sense, based on his
constant reading of the market, and he's almost kind of preternatural ability to determine whether he thinks the market
is about to go up or down based on what's happening and the orders that are
entering and leaving the market. Nav leaves Feutex in 2008 in the midst of the
global financial crisis. The banking sector bore
the brunt of the collapse with shares in Europe's major banks tanking by as much as 9%. By that stage, he's in his late 20s and he's already accumulated
about $2 million. Lehman Brothers has just collapsed. I don't think anyone really expected a bank as big as Lehman to be in a position that it's in now. The entire global financial
system is in danger. We're in the midst of a
serious financial crisis and the Federal Government is responding with decisive action. There's governments around the world stepping into save financial institutions. And this is Nav's, I guess, first very big and successful trade, almost career-defining trade. He decides that with market
prices as low as they are, eventually the government
is gonna have to step in and rescue them. So he places all of his money, which at that stage is a
couple of million dollars on this bet that the
government is gonna intervene and prices will rise again. And he times it absolutely perfectly. He places a trade on a Friday. The following Monday, the U.S. government
announces this big bazooka. Under our proposal, the Federal Government
would put up to 700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system. And over the course of that week U.S. prices increased by 19%. Nav had ridden the wave, the entire wave, and he goes from a position of $2 million to suddenly being worth $15 million. And really that's when
he hits the big time. One of the striking things about Navinder, is that he really doesn't spend any of the money he makes at all. He kinda makes a decision early on that he doesn't wanna tell
his friends and family about the money. He doesn't want to be seen as a show off, and he doesn't want them
to treat him differently. So rather than actually spending the money or telling other people about it he just keeps it to himself. And he lets the dollars grow
in his profit and loss account. You would have thought
that Nav will be delighted at the money that he's made and his position and how successful he is but there's something that's
frustrating and bugging him. And that is the arrival in the markets of this kind of new breed of participant that are known as high frequency traders. So what is high frequency trading? Well, high frequency trading is where the markets have evolved to. So people have written rules
that would normally be executed in a human being's
brain into the computer. And they trade at very high
frequencies and high speeds because the computers and
the communications lines allow them to. They buy just before other people do and then resell them at a small increase pocketing the tiny profit. So what's happening is a kind of skim. People are getting
scalped in the market. Well, for Nav he wasn't so interested in the kind of equality of the markets. He was more frustrated that his profits and his ability to kind of make money was getting squashed by these robots. We have executed 21
million shares already. Wow and we are not even three minutes in. So in 2009, 2010, he makes this kind of fateful decision that he's gonna build his own robot that's gonna fight back
against the HFT firms, and what he was planning to do was to essentially manipulate the market. And after a few, I
guess, teething problems, it starts to work incredibly well. From his bedroom, he's able to routinely nudge the world's second largest Futures market. He could quite easily make half
a million dollars in a day. In the week before the flash crash, on one day he made $400,000. The next day he made $800,000. And if you can imagine
he lives in Hounslow, his parent's house is worth $300,000 and he's making three times
that amount every single day. Welcome to Street Signs on
this Thursday afternoon, a big afternoon as stocks accelerate their slide. May 6, 2010 is an extremely volatile day. There is a feeling that
the European Central Bank and bankers have lost
control of this situation. There's this index known as the 'fear index' in financial markets, which kind of monitors volatility. And that morning it was up 30% and Navinder starts to use his machines to pump sell orders
into an already falling and a very, very volatile market. For Nav, you know, if you can imagine a big wave surfer and he looks out at the swell and there's just huge waves. It's like the dream. It's like a once in a year long condition. He switches his computer on at half past nine in the morning, and he starts pumping these sell orders using his algorithm into the market. In the afternoon he gets to a point where he's placing $200 million of orders, and he's having this huge success. At 1:40 PM, exactly, it's not clear exactly why, maybe his mom had called
him down for dinner, it's seven o'clock in London, Nav decides to switch the computer off. Great day's work. He's made $950,000. Completely wiped out. Now exactly one minute after that is when the market starts
falling at a rate and a velocity that it never has before. Traders say this is the craziest day they have ever seen. Nav is essentially a bystander as the bottom falls out of the market. And we have this, you
know, very dramatic event which comes to be known
as the flash crash. The flash crash, which wiped a trillion dollars off the value of American
companies in five minutes. The biggest sudden fall on record before markets bounced right back. Officials are meeting this week with executives from the New
York Stock Exchange and NASDAQ to see if the issue of
different exchanges having different rules played a role in
Thursday's rapid free fall. Over the next couple of months there is a very deep dive into exactly what was going on that day, who was trading, and trying to get to the bottom of this really what was a mystery
at that point in time. The U.S. regulators a few months later produced this very detailed report in which they discuss what happened. No where to be seen in
this hundred page report was any reference to manipulation and certainly no reference to a guy in his bedroom in Hounslow. So Navinder, as you can imagine, is completely oblivious to
these investigations in the U.S., and you know, he only becomes
more and more successful after the flash crash. At this point in time, you start to have the exchange and the regulators almost noticing that he's canceling a lot of orders, and famously at one point in time he gets a letter from the exchange asking him to essentially
explain what he's been up to and he tells them "To kiss my ass". Ultimately, it wouldn't be the regulators that would catch Nav. It will be someone more like him, another day trader who was operating, not out of his bedroom, but in a small firm in Chicago, who was back testing his own software and happened to notice that
on the day of the flash crash there were all these
weird blocks of orders that were entering and
then leaving the market. And he blows the whistle and the information arrives at the CFTC. The CFTC at that point in time has spent years really being a regulator for agricultural markets. To understand and to be able to analyze what's going on in financial markets at a kind of granular level
is incredibly complicated. And at that point in time, there's only a few people at the CFTC who've got that expertise, one of them is Jessica Harris. Can I get like an
emissary, like a stand in? No? The data sets that we
reviewed for Nav's activity showed he would place
these orders together and modify those orders several, sometimes thousands of times, or hundreds of times before then canceling them and not getting hit. So effectively, U.S. prosecutors
say that Navinder Sarao was engaged in illegal trading. They say that he was doing something called spoof and layering. Basically, traders will flood the market with the intention of then - with orders of a certain security, with the intention of then
canceling those orders. And what that does is it artificially drives the price of that
security up or down. So after a year or so, the CFTC starts to become comfortable that they've identified
genuine manipulation and massive scale manipulation. And so what they do at that point is they decide to get involved
the Department of Justice. They're the ones that
can throw you in jail. They're the ones that can subpoena you. They're the ones that
you really don't want knocking on your door. So in February of 2015, a judge signs an arrest warrant for Nav. And at that point essentially
his fate is sealed he just doesn't know it yet. So it's the morning of the arrest and half a dozen police officers, two prosecutors from the
U.S. Justice Department and two agents from the FBI rendezvous at a McDonald's
that Nav knows incredibly well, which is about a mile from his house. And they discuss how they're gonna arrest this criminal mastermind. As the sun rises that morning, they creeped through
the streets of Hounslow and arrive at this address, where sleeping upstairs
in bed is Navinder. They knock on the door
and Nav's dad answers. He shouts upstairs and down the stairs, kind of pads, this guy in tracksuit
bottoms and a t-shirt, his hair askew, looking utterly confused. As he's led out of the house in handcuffs, he turns to one of the officers and says, "Can I run
upstairs a minute bruv there's a football match on
telly that I want to record." And the officer says, "I don't think you're gonna get a chance to watch that for a while son." You know, as it turned out, he wouldn't set foot in the
house for another four months. Pretty hard for people
in this neighborhood to get their heads around. This is a real working class neighborhood. Excuse me sir, is the family making any comments today? I'm very surprised. You know what I mean? I've lived here all my life, and I know a lot of the
neighbors around there. Everyone gets on, you know. Very, very nice His dad is probably not feeling well from quite a long time, so. So a lot of people in the markets and particularly people like him that were on the outskirts, that were day traders, they almost idolized this guy who had made a fortune from nothing and had found a way to fight back against a system in which, you know, the most well-funded
and well-connected firms are the most successful. And for guys like, you
know, for guys like them, it was almost impossible to be profitable. Ryan Chilcote sat down with a former boss of the alleged flash crash
trader, Navinder Sarao. It can go one of two ways. If he's found innocence
of the allegations, then he will be the
world's superstar trader. The British trader accused of helping cause the May 2010 flash crash spent last night in jail. They threw the book at him. There was 22 criminal counts against him, which had a cumulative total
of 380 years in prison. And the judge looks at
how much money he's made and sets bail at 5 million pounds. And, you know, for Nav, who's worth tens of millions of pounds, that should be fairly easy to get hold of. What's unclear to me is
how much money he made. And such a great trader, I'm assuming he probably
has seven and a half million just lying around. Yeah. So everybody's asking that question because he was granted
the conditional bail, but he has failed to post the seven and a half million dollars. So now he's still in the clink. His lawyers start getting in touch with his various investment advisors who taken Nav's money over the years and suddenly they don't answer his calls and it becomes clear, disturbingly over time, that all the money that Nav's put aside, all the profits that he's made over his successful trading career, may not be safe after all. Has he been scammed out of $50 million? It looks that way Mark, yes. I mean, it's one of those stories that it's almost a too crazy to believe. Any anyone that offered
him a good rate of return. Some of the places that he put his money offered him risk-free returns. And he seems to have
been kind of willingly, you know, very kind of
willing to put it there. Nav on the one hand is this kind of brilliant,
brilliant trader, on the other he's a kind of naive kid who's never worked at a bank, has no commercial experience. And, you know, for want of a better word has been duped by these guys. The bulk of his money was with this entrepreneurial called Jesus who turned around and said, "Mea culpa, I lost it all. You know, I'll give it
back to you when I can." And in the end, the judge
decides to lower bail. So his parents have to put
up the value of their house and he gets let out. The British trader accused of helping cause the May 2010 flash crash is free on seven and a
half million dollars bail. The judge in the U.K. decided that he should be extradited to the U.S. to stand trial. And what happens next is that his lawyer, who used to work at the
Department of Justice himself as a prosecutor, flies to Washington and
tries to strike a deal. And he speaks to the prosecutors and he says, "Yes, you could go to trial, but there's a risk that you could lose. And Navinder is a very vulnerable guy. Maybe the jury would feel sorry for him. Why don't we strike a deal?" You know, we saw this guy who, you know, initially, we believed to
be part of a bank or an HFT based on his tradings activity and the size and the
money that he was making to somebody who evolved into just, you know, a lone trader or an individual trading out of his house who didn't spend any money. And it was, I think, difficult to see what
that motive was for him. I'd say the DOJ, you know, weighs it up and
ultimately agrees to that. And then he pleads guilty. By the time it came to
Nav being sentenced you have the U.S. authorities having a very different perception of him. On the one hand, he
was incredibly helpful. He opened their eyes to
how market abuse goes on. He helped them build a number of cases. You know, he was about as useful a witness as you can imagine. But beyond that, he was also so far removed from the archetypal
greedy financial criminal. By this stage, he'd been diagnosed with
Asperger's syndrome, which kind of provided a useful reason for a lot of his actions. You know, he's, kind of the way that he's treated the authorities. So by that stage, the U.S. authorities wrote
a note to the judge where essentially they said, listen, he's had enough punishment. He's been incredibly helpful to us. We recommend that we let
him off at this point with time served. And that's quite a remarkable thing for the U.S.. government to say. And I think if you take
everything into consideration, you know, the fact that
he essentially lost all of his money, you know, I believe that the government made the right decision. So the judge in the end sentences Nav to a year of house arrest. You know, there was a great
circularity to the story because that's where he got
in trouble in the first place. And obviously, as ever,
Nav's timing was impeccable because within a couple of months, because of the pandemic, we were all in lock down anymore. I traced Nav's finances very closely. And over the course of his trading career he made in the region of $70 million. I would like to say that the
hidden twist in the story is that Nav squirreled away a few million, and that, you know, when
this all blows over, he'll go to a desert island somewhere but sadly, you know, having
looked very closely into it, I don't believe that's true. Nav is penniless. And to be honest with you I don't think its made much
difference to his life at all. He still cycles around
Hounslow on his bicycle. He still plays football
with his mates once a week. He still gets a Filet-O-Fish
from McDonald's. So for Nav, because the
money never meant anything - hasn't changed his life too much.
This video is great - the story is incredibly interesting and well explained. It's funny how the journalist clearly has a soft spot for the guy.
What does /r/wallstreetbets think of this guy?
Everyone from WSB is taking detailed notes.
Yea that was an interesting and well done news piece. cheers The guy has to be back trading and slowly building his wealth no?
Is this why the nerds over on wallstreetbets call themselves autists? Or does high functioning autism and superior trading skills go hand-in-hand?
So he made a quant analysis computer and ya'll are saying his money nosedived because of some "Foolish Investments" ?
Is it correct to say that you can only be in a position to pull such a scheme with a large amount of money? (I.E. You need a lot of money to put up large orders to then manipulate and eventually cancel the order). I don't understand how that works.